The forms of enterprises in China mainly include:

• limited liability companies;
• joint-stock limited companies;
• partnership enterprises; and
• sole proprietorship enterprises.

Generally, limited liability companies and joint-stock limited companies are used as business entities to pay taxes.

The transparent entities in China are partnership enterprises, which adopt the principle of "divide first, tax later" and directly levy individual income tax or enterprise income tax on the partners. This is also the type of entity commonly used by private equity funds.

The Chinese tax authorities use a combination of the "standard for the place of registration" and the "standard for the place of actual management" to determine the resident status of an enterprise. According to Article 2 of the Enterprise Income Tax Law of the People's Republic of China, a resident enterprise refers to an enterprise established in China according to law, or established in accordance with the laws of a foreign country (region) but with an actual management office in China.

A non-resident enterprise refers to an enterprise established in accordance with the laws of a foreign country (region) and whose actual management office is not in China, but that has established an institution or place in China, or has no institution or a place in China, but has income derived from sources in China. "Institutions and venues", as used above, refers to institutions and venues engaged in production and business activities within the territory of China, including:

• management agencies, business establishments and offices;
• factories, farms and places where natural resources are exploited;
• places where services are provided;
• places engaged in construction, installation, assembly, repair, exploration and other engineering operations; and
• other institutions and venues engaged in production and business activities.

The corporate income tax rate is 25%, and the applicable tax rate for non-resident enterprises to obtain income from within China is 10%.

The taxable profit of a corporate enterprise is revenue minus expenses, which is basically consistent with the accounting method of profit. Enterprises can achieve the purpose of tax planning through accounting adjustment.

Corporate income tax is calculated on the basis of taxable income, not accounting profits. The taxable income is the total income of an enterprise in each tax year after deducting non-taxable income, tax-free income, deductions and losses of previous years that are allowed to be made up. Enterprises can achieve the purpose of tax planning to a certain extent through accounting adjustments.

According to the current tax policy, the actual R&D expenses incurred by enterprises in R&D activities can be deducted in accordance with a certain proportion (75%–100%) before tax.

According to Announcement [2021] No 13 of the Ministry of Finance and the State Administration of Taxation (SAT), for R&D expenses actually incurred by manufacturing enterprises in carrying out R&D activities that have not formed intangible assets and been recorded in the current profit and loss, on the basis of actual deduction as required, 100% of the actual amount shall be deducted before tax as of 1 January 2021.

According to Cai Shui [2018] No 64, for expenses incurred in entrusted overseas R&D activities, 80% of the actual amount of such expenses shall be included in the entrusting party's entrusted overseas R&D expenses. The entrusted overseas R&D expenses, to the extent of not more than two thirds of the domestic R&D expenses that meet certain conditions, may be regarded as the enterprise's income in accordance with the regulations.

In addition, the 2022 Government Work Report clearly proposes that efforts will be made to:

• intensify the implementation of the weighted deduction policy for R&D expenses;
• increase the proportion of the weighted deduction for technology-based small and medium-sized enterprises from 75% to 100%;
• implement tax incentives for enterprises' investment in basic research; and
• improve the accelerated depreciation of equipment and appliances, as well as income tax incentives for hi-tech enterprises.

There are many preferential tax policies for various industries and fields in China, which cannot be listed one by one due to space considerations.

If an enterprise incurs a loss in a tax year, it may carry it forward to the following year to make up for the income of the following year, which may be carried forward for a maximum of five years.

Article 38 of the Implementation Regulations for the Enterprise Income Tax Law stipulates that interest expenditure incurred by an enterprise in production and business activities may be deducted, as follows.

• Loan interest paid by a non-financial enterprise to a financial enterprise, deposit interest and inter-bank lending interest paid by a financial enterprise, and the enterprise's bond interest paid upon approval; and
• loan interest paid by a non-financial enterprise to a non-financial enterprise shall not exceed the amount calculated according to the interest rate of the same type of loan of the financial enterprise for the same period.

With respect to the interest expenses of a loan taken out by an enterprise from an internal employee or any person other than those as prescribed above, if such loan meets the following conditions at the same time, the part of the interest expenses that does not exceed the amount calculated at the interest rate for the same type of loan with the same term from a financial enterprise may be deducted, in accordance with Article 8 of the Tax Law and Article 27 of the Implementation Regulations for the Tax Law, if:

• the loan between the enterprise and the individual is true, legitimate (non-usurious) and effective, and does not have the purpose of illegal fundraising or violate laws and regulations; and
• a loan contract (written) has been entered into between the enterprise and the individual.

No information is available in this jurisdiction.

A company's capital gains are divided into two categories: equity transfer income and dividend income. All are calculated and collected in accordance with the general tax rate of 25% of enterprise income tax, but dividends and bonuses paid between companies are tax-free income.

Chinese-registered companies do not have to pay additional taxes.

In a transaction, the registered enterprise may be required to pay VAT, consumption tax, urban maintenance and construction tax, stamp duty, an education fee surcharge, a local education surcharge and other taxes and fees, which need to be judged through specific business models.       

There are 18 types of taxes in China, namely: VAT, consumption tax, enterprise income tax, individual income tax, resource tax, urban maintenance and construction tax, real estate tax, stamp duty, urban land use tax, land value-added tax, vehicle and vessel tax, ship tonnage tax, vehicle purchase tax, customs duties, cultivated land occupation tax, deed tax, tobacco tax, and environmental protection tax. Registered enterprises need to combine their own business to determine the types of taxes to be paid in the process of operating in China.

Local businesses in China mostly operate in corporate form.

There used to be a large number of sole proprietorships in China to reduce the tax rate on personal income, but in recent years, the Chinese tax authorities have gradually intensified their inspections, and if such entities are judged to have "no reasonable commercial purposes", the tax authorities have the right to define such acts as tax evasion and investigate and punish them.

According to Article 45 of the Enterprise Income Tax Law, if an enterprise established by a resident enterprise, or a resident enterprise or a Chinese resident enterprise established in a country (region) where the actual tax burden is significantly lower than the tax rate level specified in paragraph 1 of Article 4 of this law, does not distribute or reduce the distribution of profits due to reasonable business needs, the part of the above-mentioned profits that should belong to the resident enterprise shall be included in the current income of the resident enterprise.

At the same time, the Notice of the State Administration of Taxation on Simplifying the Determination of the Actual Tax Burden of the Country where the Chinese Resident Shareholders Control the Foreign Enterprise (Guo Shui Han [2009] No 37) stipulates that if a Chinese resident enterprise or a resident individual can provide information to prove that the foreign enterprise under its control is established in the United States, the United Kingdom, France, Germany, Japan, Italy, Canada, Australia, India, South Africa, New Zealand or Norway, it is exempt from treating the profits of the foreign enterprise that are not distributed or reduced as dividends. The profits are excluded from the current income of Chinese resident enterprises.

Dividends and bonuses obtained by individual investment companies shall be taxed at a rate of 20%.

The income generated by the sale of shares in listed companies by individuals is not taxed in China.

According to the Enterprise Income Tax Law, the applicable tax rate for withholding tax for non-resident enterprises is 20%. Since 1 January 2000, for foreign enterprises without institutions and premises in China, the interest, rent, royalties and other income they receive from China have therefore been subject to an effective withholding tax rate of 10%.

In recent years, China's tax treaty network has covered 111 countries and regions, ranking fourth in the world in terms of the scale of its treaties, and it has updated and issued investment tax guidelines covering 104 countries (regions), and signed bilateral memorandums of co-operation with tax departments in 18 countries.

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In recent years, through in-depth analysis of related-party transactions of multinational companies, the Chinese tax authorities have identified some new tax avoidance trends, and there are tax-related risks in transfer pricing in the following aspects:

• mixed control of multi-type related-party transactions, opaque and fixed pricing methods of related-party transactions, and low profit levels of enterprises;
• the proportion of related purchases and sales is not large or there are no related purchases and sales transactions, but a large number of fees are paid to domestic and foreign related parties, and some of the payment items and directions have changed significantly between the years;
• primarily in terms of domestic companies, the problem of internally linked transfer pricing and payment of various nominal management service fees has become increasingly prominent;
• the shareholding structure is complex and changeable, concealing the true related-party relationship and related-party transactions, or substantially controlling the trading activities to transfer profits;
• the identity of the actual beneficiary is in doubt, the behaviour of the foreign shareholders is irregular, and there is a serious suspicion of tax evasion; and
• the identity of a mother and child is exchanged, and the foreign capital is a new investment enterprise in China.

According to Article 29 of the SAT's Taxation Announcement [2017] No 6, when the tax authorities conduct an investigation and analysis of related-party transactions, they shall determine whether the benefits obtained by the enterprise match the functions performed or the risks it assumes.

Where the concealment of related-party transactions between an enterprise and its related parties directly or indirectly leads to a decrease in the overall tax revenue of the state, the tax authorities may implement special tax adjustments by restoring the hidden transactions. Where the offsetting of related-party transactions between the enterprise and its related parties directly or indirectly leads to a decrease in the overall tax revenue of the state, the tax authorities may implement special tax adjustments by restoring the offset transactions.

Although the transaction net profit method and the cost plus method are still the most important transfer pricing methods in China, in recent years, the Chinese tax authorities have been actively promoting other methods, and the SAT also hopes that applicant taxpayers can provide more adequate transaction and price information and promote the use of other transfer pricing methods, such as the resale price method and the profit division method.

Between 2016 and 2019, China's tax authorities accelerated the negotiation of mutual agreement procedures (MAPs) by increasing human resource investment and optimising allocation. In 2019, the average closing time for MAP cases initiated after 2016 and related to transfer pricing was 28.8 months, which was significantly faster than the average closing time for similar cases initiated before 2016, and the average closing time of such cases in China in 2019 was significantly faster than the international average for the same period (about 30.5 months). In addition, in 2019, China's average closing time in handling other types of MAP cases launched after 2016 was only 16.5 months, lower than the 24-month processing period recommended by the OECD for MAP cases.

According to Article 25 of Announcement [2017] No 6 of the SAT, when the tax authorities analyse and assess whether the related-party transactions of the investigated enterprises comply with the principle of independent transactions, they can choose statistical methods such as arithmetic average, weighted average or the quartile method according to the situation, and calculate the average or quartile range of profits or prices of comparable enterprises year by year or on average.

The tax authorities shall conduct year-on-year testing and adjustment of the related-party transactions of the investigated enterprises in accordance with the level of comparable profits or comparable prices. When the tax authorities use the quartile method to analyse and assess the profit level of an enterprise, if the actual profit level of the enterprise is lower than the median value of the profit margin range of the comparable enterprise, in principle, the adjustment shall be made according to a value not lower than the median.

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Article 3 of Guo Shui Fa [2009] No 3 of the SAT stipulates that if a non-resident enterprise transfers its domestic equity to a domestic resident enterprise, the resident enterprise, as the unit that directly pays the relevant amount to the non-resident enterprise (that is, the statutory enterprise income tax withholding agent) shall fulfil the enterprise income tax withholding obligation. At the same time, the resident enterprise that purchases this equity in China shall also make relevant reports to the tax authorities in accordance with the provisions of Articles 4, 5, 1 and 18 of the Guo Shui Fa [2009] No 3 Document.

It should be noted that according to the provisions of Guo Shui Fa [2009] No 3, resident enterprises should try their best to fulfil the withholding obligation first, so as not to bear legal responsibilities and bring unnecessary losses. If the withholding agent fails to withhold or is unable to perform the withholding obligation in accordance with the law, the non-resident enterprise shall, within seven days from the date of payment by the withholding agent or when due, go to the competent tax authority of the place where the income occurred to declare and pay enterprise income tax.

No information is available in this jurisdiction.

According to Article 7 of the Interim Measures for the Administration of Taxation of Permanent Representative Offices of Foreign Enterprises (Guo Shui Fa [2010] No 18), the tax authorities have the right to approve their taxable income in the following two ways for representative offices whose account books are not sound, whose income or costs cannot be accurately calculated, and that cannot be truthfully declared in accordance with Article 6 of these measures.

• Conversion of income according to expenditure – applicable to representative offices that can accurately reflect the expenditure of funds but cannot accurately reflect income or cost expenses. The calculation formula is as follows: amount of income = amount of expenditure for the current period / (1 – approved profit margin); the amount of enterprise income tax payable = the amount of income * the approved profit rate * the enterprise income tax rate.
• Approved taxable income by total income – applicable to representative offices that can accurately reflect income but cannot accurately reflect costs and expenses. The calculation formula is as follows: the amount of enterprise income tax payable = the total income * the approved profit rate * the enterprise income tax rate.

According to Article 7 of the Interim Measures for the Administration of Taxation of Permanent Representative Offices of Foreign Enterprises (Guo Shui Fa [2010] No 18), the amount of expenses of representative offices includes wages and salaries, bonuses, allowances, welfare fees, goods procurement fees (including fixed assets such as automobiles and office equipment), communication expenses, travel expenses, room rent, installation lease fees, transportation expenses, communication fees, and other expenses paid to staff members in China and abroad.

• Expenses incurred in the acquisition of fixed assets, as well as renovation expenses incurred at the time of establishment or relocation of representative offices, shall be taxed as a one-time expenditure converted into income at the time of occurrence.
• Interest income shall not be offset against the amount of expenditure; the amount of communication and remuneration incurred shall be included in the amount of expenditure in the actual amount incurred.
• Donations, late fees, fines of a relief nature in the form of money for public welfare in China, late fees, fines and expenses advanced for the head office that are not part of its own business activities shall not be used as the amount of expenses of the representative office.
• Other expenses include:
1. sample fees and transportation costs paid for the purchase of samples from China by the head office;
2. warehousing costs and customs declaration costs incurred in the transportation of foreign samples to China;
3. costs for the head office personnel to visit China to hire translators;
4. the cost of the head office bidding for a project in China; and
5. the purchase of tenders paid by the representative office.

According to the relevant provisions of the Notice of the Ministry of Finance and the State Administration of Taxation on Tax Policy Issues Concerning the Pre-tax Deduction Standards for Interest Expenses of Related Parties of Enterprises (Cai Shui [2008] No 121), when calculating the taxable income, the interest expense paid by the enterprise to the related party shall not exceed the following prescribed proportions and the part calculated by the relevant provisions of the Tax Law and its implementing regulations, and the excess part shall not be deducted in the current period and subsequent years.

In addition to complying with the provisions of Article 2 of this notice, the ratio of the interest expense paid by the enterprise to the related party is as follows:

• financial enterprises – 5:1; and
• other enterprises – 2:1.

If an enterprise can provide relevant information in accordance with the relevant provisions of the Tax Law and its implementing regulations and prove that the relevant trading activities comply with the principle of independent transactions, or if the actual tax burden of the enterprise is not higher than that of the domestic related party, the interest expense actually paid to the domestic related party shall be allowed to be deducted when calculating the taxable income.

Where a resident enterprise invests in the establishment of a branch office that does not have an independent tax status, its income derived from overseas sources shall be taxable income based on the balance of the total overseas income after deducting various reasonable expenses related to the acquisition of overseas income, and whether or not it is remitted back to China, it shall be included in the overseas taxable income of the relevant tax year.

The amount of tax deductible for overseas income tax refers to the enterprise income tax that an enterprise derives from sources outside China and that shall be paid in accordance with China's overseas tax laws and relevant provisions, and that the enterprise has actually paid. However, the following items are not included:

• overseas income tax that is wrongly paid or wrongly levied in accordance with the overseas income tax laws and relevant provisions;
• foreign income tax that should not be levied in accordance with the provisions of the tax treaty;
• additional interest, late fees or penalties due to underpayment or late payment of overseas income tax;
• the overseas income tax actually returned or compensated for the overseas income tax payer or their interested parties by the overseas taxing entity;
• in accordance with the provisions of China's Enterprise Income Tax Law and its implementing regulations, the overseas income tax burden that has been exempted from China's enterprise income tax; and
• overseas income tax that has been deducted from the overseas taxable income of the enterprise in accordance with the relevant provisions of the competent department of finance and taxation under the State Council.

Where a resident enterprise obtains dividends and other equity investment income derived from overseas sources, or a non-resident enterprise sets up an institution or place in China and obtains dividends and other equity investment income derived from abroad but actually linked to the institutions or venues established in China, it shall recognise the realisation of income according to the date on which the investee made the profit distribution decision, and the balance after deducting reasonable expenses related to the acquisition of such income shall be taxable income.

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A resident enterprise that obtains income derived from overseas sources – such as interest, rent, royalties, transfer of property – or a non-resident enterprise establishing an institution or place in China and obtaining income derived from abroad but actually linked to the establishment or venue in China shall recognise the income as realised on the date of the transaction consideration payable as agreed in the relevant contract, and the balance after deducting the reasonable expenses related to the acquisition of the income shall be taxable income.

In recent years, the pace of updating and improving China's international tax regulatory system has accelerated significantly, and an anti-tax avoidance legal system covering multiple taxes has been formed. The Measures for the Administration of General Anti-Avoidance (Trial Implementation) (Order No 32 of the SAT) is the first achievement related to the BEPS Action Plan in China and has played a positive role in general anti-avoidance management. The Announcement of the State Administration of Taxation on Matters Related to Improving related declarations and the management of information during the same period (SAT Announcement [2016] No 42) creates conditions for strengthening the tax supervision of multinational enterprises, the Announcement of the State Administration of Taxation on Matters Related to Improving the Administration of Advance Pricing Arrangements (SAT Announcement [2016] No 64) standardises the management of advance pricing arrangements and improves the negotiation and signing process, and the Administrative Measures for the Adjustment of Special Tax Investigations and Mutual Consultation Procedures (SAT Announcement [2017] No 6) clarifies issues such as the entities and procedures involved in an anti-avoidance investigation.

The newly revised Individual Income Tax Law in 2018 added an anti-tax avoidance clause; that is, for individuals who do not conform to the principle of independent transactions and reduce the tax payable by themselves or their related parties without justifiable reasons; enterprises under the control of individual residents or under the joint control of individual residents and resident enterprises set up in countries (regions) with significantly lower actual tax burdens have no reasonable operation needs, and the profits attributable to individual residents are not distributed or reduced in distribution. The tax authorities shall have the right to adjust the tax payment in a reasonable manner if an individual obtains improper tax benefits through other arrangements without reasonable commercial purposes.

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The G20 international tax reform with the BEPS project as an important component is one of the most major adjustments regarding international tax rules in the past century, and is an important practical achievement of countries' active participation in global tax governance and co-operation.

As a member of the G20, China has deeply participated in the G20 tax reform and actively promoted the construction of a fairer and more reasonable international tax system in the world that is more adapted to the trend of globalisation. Through participating in the research, discussion and transformation of the results of the BEPS project, China's voice has been effectively heard in the field of international taxation, reflecting the responsibility of a big country; at the same time, strengthening international co-operation, drawing on international experience, optimising the domestic tax system, and better safeguarding the legitimate rights and interests of domestic taxation interests and cross-border taxpayers.

As a founding member of the G20, China has always actively participated in the G20 international tax improvement process, made important contributions to the establishment and promotion of the smooth completion of various achievements, and played a unique role in enhancing the discourse power of developing countries and emerging economies in rule-making and safeguarding their tax rights and interests.

In the post-BEPS era, China's tax authorities will continue to pay attention to the development trend of international taxation, follow up and study the new challenges brought about by economic digitalisation, accurately judge the international situation, contribute to the formulation of international rules, and continuously improve the modernisation level of international tax governance.

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